Treasurys fall after Fed meeting minutes

Short-term T-Bill yields continue climb on debt-ceiling unease

NEW YORK (MarketWatch) — Treasury prices dipped Wednesday after the release of the Federal Reserve’s policy meeting minutes, but remained largely focused on the standoff in Washington over raising the debt ceiling.

The benchmark 10-year Treasury note
US:10_YEAR
yield, which moves inversely to price, rose 3 basis points to 2.665% after touching as high as 2.674% just after the minutes were released.

U.S. House Speaker John Boehner and President Barack Obama remained far apart on a solution to the fiscal feud playing out in Washington, which has rattled portions of the Treasury market.

During the Federal Open Market Committee meeting in September, members of the central bank mostly agreed to begin winding down their $85 billion in monthly bond purchases before the end of the year, meeting minutes show. The Fed surprised markets last month when it decided not to begin withdrawing its economic stimulus in September.

“It showed a pretty deep divide on the pros and cons of tapering at the last meeting,” said Karim Basta, director of economic research and chief investment strategist at III Associates. “That is likely to remain a feature going forward.”

Chicago Fed President Charles Evans said in a speech Wednesday that he would be open to lowering the threshold necessary for the Fed to start hiking its short-term interest rates. Currently the Fed says it will hold rates low until the unemployment rate hits 6.5%, but he could be convinced to revise that rate to 6%, he said.

Fiscal focus

The Treasury market remained focused on fiscal debates playing out in Washington, as an Oct. 17 deadline looms to raise the U.S. borrowing limit. The second week of a partial government shutdown so far has not brought lawmakers closer to raising the debt ceiling or passing a spending bill.

Meanwhile, the small likelihood — due to the debt-ceiling impasse — of a delay in payments on ultra-short-term notes has sent 1-month Treasury note
US:1_MONTH
yields, which move inversely to prices, to their highest level since 2008. The 1-month bill maturing on Oct. 17 traded at a yield of 0.474% on Wednesday, according to Tradeweb, up from 0.028% on Sept. 30.

“Even if you put a low probability on [a technical default], you are seeing investors demand a premium for paper coming due around the debt-ceiling deadline,” said Russ Koesterich, chief investment strategist at BlackRock.

Fidelity Investments sold all of its one-month Treasurys that mature around the debt ceiling deadline, according to an Associated Press report.

How a U.S. default would hurt China

(2:47)

China holds nearly $1.3 trillion in U.S. Treasury debt. Deborah Kan chats with the WSJ's Aaron Back about the risks of a default and the potential repercussions for China and the world.

A key concern for buyers of the bills, often used as collateral in short-term borrowing, is that liquidity could dry up in the market. Some firms are barring the use of Treasury bills maturing this month in their pertinent role as collateral in repos, according to a Wall Street Journal report, which cites an unnamed source.

“Investor nervousness in the front end is largely driven more by fears related to a loss of liquidity than a loss of principal,” said Joseph Abate, money market strategist at Barclays, in a note. “And because the sector places extreme importance on maintaining liquidity, investors have a strong incentive to step away from transactions or securities that could – even peripherally – be affected by a delay in increasing the debt ceiling.”

10-year note auction

Despite the fiscal standoff, an auction of 10-year notes was completed Wednesday at average levels. The benchmark notes sold at a yield of 2.657%, slightly below where the broader market was trading at the time. Buyers put in bids for 2.58 times the amount of debt for sale, just below the recent average of 2.65 times in the last six 10-year note sales.

Direct bidders came in solidly, with that category of investors, which can include domestic money managers, taking down 21.2% of the sale, compared to a recent average of 19%. Indirect bidders, which can include foreign central banks, bought 38.6% of the sale, compared to an average of 40.7%. Nomura Securities gave the auction a grade of B.

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